Contemporary Issues And Contemporary Issues And The Impact Of Technology The Impact Of Technology

On Management On Management AccountingAccounting

Reasons for carrying inventory1. To balance ordering or setup costs and carrying costs

2. Demand uncertainty

3. Machine failure

4. Defective parts

5. Unavailable parts

6. Late delivery of parts

7. Unreliable production processes

8. To take advantage of discounts

9. To hedge against future price increases

• Three types of inventory costs can be readily identified with inventory:

(1)The cost of acquiring inventory.

(2)The cost of holding inventory.

(3)The cost of not having inventory on hand when needed.

Costs related to holding & managing inventoriesCosts related to holding & managing inventories

Inventory ManagementInventory Management

TC = PD/Q + CQ/2

• TC = The total ordering (or setup) and carrying cost• P = The cost of placing and receiving an order (or the

cost of setting up a production run)• Q = The number of units ordered each time an order is

placed (or the lot size for production)• D = The known annual demand

• C = The cost of carrying one unit of stock for one year

Economic Order Quantity (EOQ)Economic Order Quantity (EOQ)

Inventory ManagementInventory Management

An EOQ Illustration

EOQ = 2DP/C

EOQ = (2 x 25,000 x $40) / $2

EOQ = 1,000,000

EOQ = 1,000 units

D = 25,000 unitsD = 25,000 units P = $40 per orderP = $40 per order

Q = 500 unitsQ = 500 units C = $2 per unitC = $2 per unit

Traditional Production Systems

• Often described as “push systems.”

• Keep large inventories on hand

• Problems:• Storage cost• Hide quality• Bottlenecks and obsolete products

• Solution: Lean Productions System

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Lean Production System

• Philosophy and a business strategy

• Primary goal is to eliminate waste and cost

• Focus of JIT:– Purchase raw materials just in time for

production

– Finish goods just in time for delivery

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“Just-in-Time” (JIT)

• Common characteristics– Production occurs in self-contained cells– Broad employee roles– Small batches produced just in time –

“demand-pull system”– Shortened setup times– Shortened manufacturing cycle times– Emphasis on quality– Supply-chain management

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Complete productsjust in time to

ship customers.

Complete productsjust in time to

ship customers.

Complete partsjust in time for

assembly into products.

Complete partsjust in time for

assembly into products.

Receive materialsjust in time for

production.

Receive materialsjust in time for

production.

Just In Time (JIT)Just In Time (JIT)

Scheduleproduction.

Scheduleproduction.

Receive customer orders.

Receive customer orders.

Drawbacks to Lean Production System

• Vulnerable when problems strike suppliers or distributors

• Examples– Delays in delivery – Personnel problems – union strikes– Shortage of parts due to recalled products– Weather related issues

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Flexibleworkforce

Flexibleworkforce

Reducedsetup time

Reducedsetup time

Zero productiondefects

Zero productiondefects

Improvedplant layout

Improvedplant layout

Reduced inventory

Reduced inventory

Just In Time (JIT) ConsequencesJust In Time (JIT) Consequences

JIT purchasingFewer, but more ultra reliable suppliers.

Frequent JIT deliveries in small lots.Defect-free supplier deliveries.

JIT purchasingFewer, but more ultra reliable suppliers.

Frequent JIT deliveries in small lots.Defect-free supplier deliveries.

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More rapid response to customer orders

More rapid response to customer orders

Freed-up fundsFreed-up fundsReducedinventory costs

Reducedinventory costs

Greater customersatisfaction

Greater customersatisfaction

Benefits of Just In Time (JIT) SystemBenefits of Just In Time (JIT) System

Higher qualityproducts

Higher qualityproducts

Increased throughput

Increased throughput

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• For control purposes, performance measures should coincide with the goals of JIT

– Reducing throughput time is a primary performance measurement for JIT organisation.

– Team effort is important in JIT environments, so performance measures should reflect cooperative goals.

Accounting System Changes in Response Accounting System Changes in Response to JIT to JIT

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• Significantly reduced the number of accounting transactions.

• There is less need to worry about valuing partially completed products (WIP).

Accounting System Changes in Response Accounting System Changes in Response to JIT to JIT

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• The oldest manufacturing control system.• MRP – is an operation management tool that uses a

computer to help manage materials & inventories.• Components:

– Bills of materials (BOM)– Master production schedule (MPS)– Material requirement planning system (MRPS)

• Nowadays MRP/MRPII is embedded in ERP.

Material Requirements Planning (MRP) Material Requirements Planning (MRP)

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• Objectives of MRP:

– To ensure – right materials, in right quantitiesand at right time are on hand

• Strength of MRP – ability to determine precisely the feasibility of a schedule within capacity constraints

Material Requirements Planning (MRP) Material Requirements Planning (MRP)

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• MPS:

– Specifies what is to be made and when

– Must be in accordance with a production plan (sets the overall level of output in broad terms)

– Tells what is required to satisfy demand and meet the production plan

Master Production Schedule (MPS) Master Production Schedule (MPS)

Management Accounting Changes/Innovations

• Activity-based management

• Just in Time

• Total Quality Management

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• ABM focuses on the activities incurred during the production or performance process => improved the value received by a customer

& profit.• ABM focuses on accountability for activities

rather than costs & emphasis the maximization of system-wide performance instead of individual performance => global approach to control.

• In ABM – both financial & non-financial measures of performance are important.

Activity-Based Management (ABM) Activity-Based Management (ABM)

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• Activity analysis

• Cost driver analysis

• Activity-based costing

• Continuous improvement

• Operational control

• Performance evaluation

• Business process reengineering

Activity-Based Management - ConceptActivity-Based Management - Concept

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• Activity analysis – primary component of ABM.

• Activity analysis => process of studying the activities

• Activity => repetitive action performed in fulfillment of business functions

• Activity :– Value-added (VA)– Non-value-added (NVA)

Activity-Based Management (ABM) Activity-Based Management (ABM)

Activity-Based Management (ABM)• VA – increases significantly the value of the

product/services to the customers.• VA are those:

– Necessary or required to meet customer requirements or expectations;

– That enhance purchased materials of a product;– That are critical steps and cannot be eliminated in

a business process;– That are performed to resolve or eliminate quality

problems.

Activity-Based Management (ABM)• NVA – consumes time, resources, or space, but adds

little in satisfying customer needs.• If eliminated, customer value or satisfaction remains

unchanged.• NVA are those that:

– Can be eliminated without affecting the form, fit, or function of the product/service;

– Begin with prefix “re” (such as rework or returned goods);

– Result in waste and add little or no value to the product/service;

– Are performed due to a request of an unhappy or dissatisfied customers;

– If given the option, you would prefer to do less of.

Activity-Based Management (ABM)VA NVA

Designing products X

Setting up X

Waiting X

Moving X

Processing X

Reworking X

Repairing X

Storing X

Inspecting X

Delivering product X

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• ABC/ABM helps manager understand the relationship between the firm’s strategy & the activities & resources needed to put strategy into place.– Cost leadership (business strategy)

=> ABC/ABM is critical to this strategy.– Identify value-enhancement opportunities– Develop customer strategy– Support a technology leadership strategy– Establish a pricing strategy

Activity-Based Management (ABM) Activity-Based Management (ABM)

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Total Quality Management (TQM) Total Quality Management (TQM) • TQM

=> All business functions are involved in a process of continuous quality improvement

• Goals of TQM => Customer satisfaction

• TQM minimizes costs by maximizing quality.• TQM focuses on continuous improvement and

satisfying customers.

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Total Quality Management (TQM) Total Quality Management (TQM)

ContinuousimprovementContinuous

improvement

Employeeempowerment

Employeeempowerment

Total value chain analysisTotal value

chain analysis

Customer satisfactionCustomer satisfaction

Key success factorsCost, quality,

innovation

Key success factorsCost, quality,

innovation

Top priorityTop priority

Four Types of Quality Costs1. Prevention costs – avoid poor quality

goods or services – Employee training– Improved materials– Preventive maintenance

2. Appraisal costs – detect poor quality goods or services– Inspection throughout production– Inspection of final product– Product testing

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Four Types of Quality Costs3. Internal failure costs – avoid poor quality

goods or services before delivery to customers– Production loss caused by downtime

– Rejected product units

4. External failure costs – incurred after defective product is delivered– Lost profits from lost customers

– Warranty costs

– Service costs at customer sites

– Sales returns due to quality problems29

End of Topic 1